Angel News Pres 26 Jan Latest

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  • 1. Management Buy-outs Mike Wright Centre for Management Buy-out Research www.cmbor.com Angel News Presentation 26 January 2010
  • 2. Centre for Management Buy-out Research
      • Identified emergence of UK buy-out market early 1980s
        • Organised first European buy-out conference in 1981
      • Centre for Management Buy-out Research (CMBOR)
        • Established 1986 at Nottingham University Business School as first centre focusing on private equity
        • To examine developments in UK & European buy-out markets in comprehensive and independent manner
      • 25 years of research into MBO/MBIs
        • Established world leading database of buy-outs
          • Currently >27,000 buy-outs in UK and Europe
      • Publications generated from database including:
        • UK Quarterly Review and European MBO Review
        • Approximately 300 academic papers and 25 books
      • Database used for detailed academic, policy & commercial studies
  • 3. Private Equity and Buy-out Trends
    • Difficult year was again predicted and realised for 2009
      • Whole market affected not just top end
        • £10-£100m deals at 30% of numbers against 46% in 2008
      • Final 2009 total PE backed value lowest since 1995 at £4.7bn
      • Deals now completed with far higher levels of equity and appearance of all equity deals
  • 4. UK Buy-out/Buy-in Trends
  • 5. UK Buy-outs/Buy-ins £10-100 million Mid-market badly hit also
  • 6. UK MBOs below £10 million
    • Fall in number and value of sub £10 million deals continues
      • Most now not Private Equity backed
  • 7. Private Equity and Buy-out Trends
    • Shift to Receiverships and Divestment as Deal Sources (No. Deals %)
    • Entry EBIT Multiples Down Sharply After Increasing Over Many Years
  • 8. Receiverships Increasing Source of Buy-outs
  • 9. Industry Sectors by Value (% of value)
  • 10. UK Buy-out Deal Structures by % Finance marked contrast to recession of early 1990s
  • 11. MBO/I Management Contribution (%)
  • 12. MBO/I Management Equity Stake (%)
  • 13. Reasons for Sale of the Business CMBOR/EVCA Impact Study
  • 14. Management motives for MBO
    • Management motivation and expertise is critical to success of the NewCo
      • Desire for independence
      • Motivation by capital gain
      • Believe target has improved prospects as an independent entity
    • Family Buy-outs
      • Succession Issues
      • Capital Transfer Tax
      • Desire to Maintain Independence
      • Reluctance to Sell to Competitors
      • Absence of Internal Management?
  • 15. Family Firm Buy-out Negotiations
    • In 43% vendor and management shared relevant information equally, 42% vendor controlled all or most information, 15% management controlled most or all of relevant information.
    • No succession planning in over 20% and only 1/3 planned succession two or more years before
    • 46% indicated a mutually agreed price had not been negotiated, of which 27% reported vendor proposed fixed price that maximised their valuation.
      • A further 11% reported the vendor suggested a fair price in best interests of the company.
    • Negotiations less likely to involve a mutually agreed price where succession process driven by the vendor.
    • Vendor controlled all or most of relevant information in MBIs
      • highlights problem for outside purchasers & suggests caution in deal negotiation; often hidden problems difficult to identify in due diligence
  • 16. Exit Numbers and Values Have Plummeted
    • Shift to receivership exits
    • Secondary buy-out exits down sharply
    • IPO exits disappeared for two years but recovery in 2010
    • MBIs typically have higher failure rate than MBOs
  • 17. Holding Period (months) Most are not quick ‘flips’
  • 18. Performance and Failure
    • Buy-out profitability greater than non-buyouts over first 3 buy-out years
    • Buy-outs improve productivity from below industry productivity before buyout
    • PE buyout failure vs non-buyout failure
      • 7million firm years 1995-2009 including all UK companies
      • Leveraged firms [of any kind] more likely to fail
      • Buy-outs where directors previously failed, more likely to fail
      • After taking into account leverage and other factors:
        • PE backed buyouts post 2003 not significantly different in failure likelihood than non-buyouts
  • 19. What Drives Performance Changes?
    • Divisional deals greater growth in sales, efficiency & profits than family & secondary deals
    • Buy-outs involve growth and NPD not just cost cuts
    • Management equity largest impact on returns
      • After adjusting for management selecting an attractive deal
    • Active PE firm monitoring important
      • Industry specialism & experience of deals done
    • Skills base to add operational value likely to become more important, with less reliance on leverage
      • Need for close understanding of business models of investees
      • Close, active involvement in boards
  • 20. Private Equity Prospects
    • 2010 outlook more positive
      • Recent announcement of more larger deals than for some time [5 in Q4 above £100m)
      • 48% increase in Q4 in PE backed deals to £943m
      • Upturn in PE backed PTPs in Q4 [4 of the 9 for 2009]
    • Times to exit likely to be up to 2 years longer overall
      • Likely surge in build-up deals to add value over a longer period
      • Gartmore IPO in 12/09 & Likelihood of IPOs in 2010
        • But limited share of exit needs
  • 21. Thank You!
    • Further reading:
    • John Gilligan and Mike Wright, Private Equity Demystified, 2 nd Edition, ICAEW, 2010
    • Downloadable from www.cmbor.org